BOH

Business Context and Reporting Period

Company: Pacific Century Financial Corporation (Parent of Bank of Hawaii Corp)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Three months ended March 31, 1999

Overview: Pacific Century is a financial services organization with a broad presence in the Pacific region, operating through four major geographic segments: Hawaii, the Pacific, Asia, and the U.S. Mainland. The company reported a 4.1% increase in net income compared to the prior year period, driven by growth in average earning assets and non-interest income, partially offset by a slight decline in net interest margin.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased by $1.4 million (4.1%) year-over-year. On a tangible basis (excluding intangible amortization), earnings rose 7.5% to $39.3 million.
• Asset Growth: Total assets increased 1.2% year-over-year to $14.93 billion. Average earning assets grew 2.7% to $13.8 billion.
• Loan Portfolio: Gross loans totaled $9.64 billion, a 2.0% increase from the prior year. The portfolio saw a shift with domestic loans decreasing slightly while foreign loans increased.
• Non-Performing Assets (NPAs): NPAs increased significantly to $163.3 million (1.69% of total loans) from $94.4 million (1.00%) in Q1 1998. This rise was driven by increases in commercial and industrial and commercial real estate categories.
• Provision for Loan Losses: The provision decreased to $12.6 million from $18.3 million in Q1 1998, reflecting lower net charge-offs ($10.8 million vs. $17.9 million).
• Non-Interest Income: Increased 15.7% to $61.2 million, driven by growth in trust income, service charges, and fees from the acquisition of Triad Insurance Agency.

Guidance, Outlook, Risks, and Unusual Items

• Acquisitions: The company acquired Triad Insurance Agency, Inc. in January 1999, expanding its financial services range. Goodwill of approximately $4 million is being amortized over 15 years. Previous acquisitions of Banque Paribas entities in 1998 continue to impact comparability.
• Restructuring: A $19.4 million pre-tax restructuring charge was recognized in Q2 1998. As of March 31, 1999, $11.5 million of the accrual had been utilized, with $7.9 million remaining, primarily for lease terminations.
• Year 2000 (Y2K) Readiness: The company estimates total Y2K costs at $41 million, with $28.9 million incurred through March 31, 1999. Management expects critical systems to be tested and ready by June 30, 1999. A contingency "event plan" is being developed to address potential disruptions from third-party failures.
• Market Risk: The balance sheet is slightly liability-sensitive. Foreign currency exposure (net investment in subsidiaries) totaled $97.4 million, with a Value-at-Risk (VAR) of $20.5 million. Significant exposure remains in Thailand and Indonesia, though cross-border assets in these countries are relatively low ($26 million and $16 million, respectively).
• Capital Adequacy: The company remains "well capitalized" with a Tier 1 Capital Ratio of 9.74% and a Total Capital Ratio of 12.87%, exceeding regulatory minimums.

Investor Verification Checklist

• NPA Trend: Verify the sustainability of the 1.69% NPA ratio and the specific drivers in the commercial real estate and industrial sectors.
• Y2K Contingency: Review the status of the "Year 2000 event plan" and the readiness of critical third-party vendors.
• Intangible Amortization: Assess the impact of goodwill amortization from recent acquisitions on future earnings per share.
• Interest Rate Sensitivity: Monitor the liability-sensitive position of the balance sheet in the context of potential interest rate fluctuations.
• Foreign Exposure: Track credit quality in Asian markets, specifically Thailand and Indonesia, despite current low exposure levels.